Happiest Minds: This multibagger IT stock is down 46% from all-time high; should you buy?

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The company’s shares witnessed an unprecedented rally between December 2020 and September 2021, soaring from 313.95 apiece to 1,380, delivering a staggering return of 340%. However, the stock has since gone through a fall, falling by approximately 39% to date, reaching 840. From its all-time high of 1,568, the stock is down 46.42%. 

Also Read: RIL, HDFC Bank, Infosys, and 5 other large caps are 7-25% below all-time highs

In April, the stock gained momentum and finished the following two months with gains, however, it failed to hold on to those rallies. Despite the stock being an underperformer for a longer period, domestic brokerage firm HDFC Securities has remained optimistic about the company’s long-term prospects.

Happiest Minds provides end-to-end solutions in the digital space. The stock was listed on the exchanges on September 17, 2020, at 351 apiece, as compared to the issue price of 166. Taking the stock’s current market price of 840 into account, it is up by 406% over its IPO price. 

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HDFC Securities, in its report, has listed the following key factors:

High potential for scalability: The brokerage has pointed out that the company has progressed well in both mining its customers as well as adding large logos. It asserts that the ask rate of market share gains for Happiest Minds is plausible and well within the historical market share displacement for companies that have scaled 5x.

Also Read: Tech giants struggle while mid tier IT companies lead amid green shoots

The brokerage believes the new organisational structure can leverage the multi-disciplinary strengths of the company and support its growth and transition to a vertical structure. It noted that the timeline of growth aspirations is at a historical average for IT companies that scaled a similar magnitude in the last 25 years.

‘High quality’ features: Happiest Minds is a capability-focused organisation with strong practices, which is reflected in its superior approval ratings as well as a stable and tenured leadership team.

It has augmented its capabilities with acquisitions to build a healthcare vertical and will continue to tap the inorganic route. According to the brokerage’s mid-tier IT assessment framework, the company scores high on growth and execution. It has strong partnerships with hyperscalers and high-growth platforms and is catching up with larger peers, the brokerage added. 

Also Read: IT cos pray for succour in H2

The brokerage highlights the company’s lowest cost of delivery as well as its low dependence on subcontractors, which it believes will support the company’s superior margin profile. The company has a diversified vertical base, reduced client concentration risk, and lower exposure to BFSI volatility.

High valuations can persist: According to the brokerage estimates, the company’s revenue and EPS will grow at 21% CAGR and 24% CAGR, respectively, over FY24–26E, which is in line with the mid-tier average.

However, the brokerage notes that the company’s valuation is higher than peers average, with PEG standing at 1.8x as compared to peers at 1.5x, which factor in ‘higher for longer’ revenue growth (16% CAGR implied growth over FY23–38E).

Also Read: Nifty IT up 5% in November; why are IT stocks rising? Should you bet?

“Faster recovery in discretionary spending in the sector and value-accretive acquisition ahead can be positive triggers for the stock, which currently trades at 42x and 34x FY25E and FY26E (valuation multiples are down >15% from 48x at the beginning of the year),” said HDFC Securities. 

Therefore, the brokerage initiated coverage on Happiest Minds with an ‘ADD’ rating, setting a target price of 935 apiece, reflecting an upside of 11.30%.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.

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Published: 06 Dec 2023, 05:39 PM IST

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